Trader’s Report 5-3

Good Day Traders,

The grandson hasn’t arrived yet so we remain in wait mode-anytime now! The first article for Forbes online will be out towards the end of the week. I’m looking forward to a great May! Some of the minor refinements we’ve made over the first part of 2015 will start to be more and more apparent going forward as we are currently seeing in the YY position. Standby for some fun!

Performance of trades through the end of April will be posted to the website this weekend and ready Monday May 4th.

Thanks for all the great comments about the ATTS service and the “How to Make Money Trading Stocks” webinar that blast out every Friday at 10 a.m. Pacific. You can either join live or catch the replay on YouTube.

It is a privilege to have Mike Trager talk about the current Chinese Stock Market bubble. Mike provides is a very welcome addition and always brings thought provoking and timely topics to the forefront.

Mike’s Macro Market Musings: Bubble, Bubble, Toil and TROUBLE (2nd in a Series) Consider this the second installment of a short series of columns discussing and illustrating financial market bubbles. In the last monthly column I had mentioned the bubble brewing in the Chinese equities markets as evidenced by charts of the Shanghai Composite Index and anecdotal accounts of a full blown mania among Chinese retail “investors”. Further evidence of the Chinese stock market bubble can be witnessed in the charts of the gaming and casino stocks who derive significant portions or their revenues and earnings from their operations in Macau, a gambling haven for the Chinese public, their Las Vegas equivalent. Revenues and earnings for these companies have significantly declined in the past year or so as the Chinese public has shifted their gambling capital from Macau to their public stock exchanges, and the prices of these stocks, WYNN and LVS for example, have accordingly also significantly declined over the past year or so with losses approaching 40-50% from peak to recent troughs. I also postulated in my last column my opinion that a bursting of the Chinese equity bubble might just be the catalyst that pricks the bubbles evident in the U.S. and other Western equity markets One year daily chart of

Shanghai Composite Index:

I will let the following charts speak for themselves. They depict the classic anatomy of a financial bubble, and the prelude and aftermath of the Nasdaq Composite dot com bubble of 2000. Compare these to the above current chart of the Shanghai Composite Index.

Anatomy of a financial bubble:

Note how the above weekly Nasdaq chart almost perfectly conforms to the above idealized graph of a typical financial bubble.

I don’t believe there can be any question that the Chinese equity markets have entered into the “greed” and/or “delusion” stages of a prototypical financial bubble, similar to the greed and delusion evidenced by the near vertical ramp in the Nasdaq in late 1999 and early 2000 shown on the above weekly chart. As of the day I am writing this (4/17/2015), news has hit the wires globally of attempts by Chinese regulators to cool things down by 1) cracking down on margin leverage offered by Chinese stock brokerage firms to the retail public and 2) making it easier to short stocks. Ironic, I think, given that many attribute the apparent Chinese market bubble to encouragement from the Chinese government. This news has created a blow off in the after-hours Chinese equity futures markets with collateral damage in the European and U.S. equity markets today, seemingly validating my theory (in the short term, at least) that a bust of the Chinese bubble might very well create similar price action in other global equity indexes. The 6-7% overnight decline in Chinese equity futures would be equivalent to a one day sell off in the Dow of well over 1000 points, or a one day sell off in the Nasdaq composite of around 300 points. Imagine the headlines in the U.S. an event of this type might create.

How might one potentially benefit from all of this? Consider short trades or put options against FXI and/or ASHR, etf’s that mirror the Chinese equity markets. In fact, ASHR is an etf that represents the Shanghai Composite Index. Or, go long on an inverse Chinese etf such as YXI or YANG (be careful with YANG, this is a 3x leveraged short etf and therefore only suitable for short term trading), both of which are currently very oversold and can be traded in a 401K or IRA account.

While physical space limits the length of this column, the next column will pick up where this one leaves off, building on the context provided within.
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General Market Observation: Earnings continue full bore this week. Even with the majority of the big names having already reported there should be enough this week on the earnings front to keep this week interesting! Of the Indexes the NDX is the strongest and the RUT is the weakest. All are close to support so there may be at least a relief rally for a potential downside setup anticipating further weakness going through the summer months. On the other hand with the short and shallow pullback history over the last few years this may be all we get before pushing higher. Any trades on with the Index ETFs are expected to be quick as long as current volatility remains.

SPX: Preferred ETF’s: SPY and SPXL

NDX: Preferred ETF’s: QQQ and TQQQ

RUT: Preferred ETF’s: IWM and TNA

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If you have not had a chance to check out the research Mike Trager and I have done to start the EWA service you can find a short 10 minute preview at: http://youtu.be/MgC9GMAWh4w

Remember if you are a premium or Early Warning Alert member you can receive Text Alerts and Trade Notifications if you send us your mobile phone number. Sent us your number with NO HYPHENS please and we’ll get you on the Text Notification List.

The How to Make Money Trading Stock Show—Free Webinar every Friday at 10 a.m. PDT. This weekly live and recorded webinar helped traders find great stocks and ETF’s to trade with excellent timing and helped them stay out of the market during times of weakness.

The “How to Make Money Trading Stocks” Show is back this Friday, May 1st

For our all Active Trend Trading Members here’s how we utilize our trading capital

Trading Capital Setup and Position Sizing: Every year we start the year off trading a $100K margin account make the math really easy for yearly returns.

Each trader must define their own trading capital in order to properly size trade positions to their own risk tolerance level!

The $100K account is split between up to 4 stocks and a leveraged Index ETF. Actual number of shares will vary of course depending on price of the entity traded. We have found that limiting open positions to only 5 entities greatly reduces the trade management time requirements for members. This goes back to our goals of providing a system designed for members who work full time.

Regardless of market conditions no more than 50% of available margin is used at any time.

Each Trade is split 50-50 between Income Generating & Capital Growth Objectives unless specified in the Order Alert

Naked Puts or short term options strategies will be used occasionally for Income Generating Positions

None of the trade setups are a recommendation to trade only notification of planned trades from set ups using the Active Trend Trading System. Each trader is responsible for establishing their own appropriate risk level on every trade.

Managing Existing Trades: 100 shares of YY remain. With the pop on Friday prices are back to 67. Like many Chinese stocks the exact earnings date was originally estimated but has now been set for 5/11 AMC. T2 remains 72.50 for 50 shares. If price does not reach that high then the 100 shares will be close prior to the close on 5/11.

Pre-Earnings Trade: There is many stocks reporting this week. Some of the notables are TSLA, GMCR and BITA. Others that may provide quick potential trades include: PAYC, BABA, MBLY, YY, CYBR and JUNO. If an entry action point does present itself we will plan to be out of any earnings trade prior to earnings. For next week watch QIHU and GDDY.

Potential Set Ups for this week: With the quick market pullback there are many stocks showing signs of potential flags which could lead to entry triggers. Here’s a short list of stocks showing potential. PANW, SWKS, BIDU, AMZN, ALXN, INCY, MBLY, GPRO, VDSI, XRS and ARRS.

Upside: PANW and INCY both look to be retesting their recent breakouts. An approach of the breakout level may provide an entry opportunity. If the breakout fails this would be the trigger to exit a long trade.

Toss Ups: VDSI, CUDA, SBUX are all stocks that could go either way. VDSI is trying to hold support at 24.81 and SBUX has support around 49.50.

Leveraged Index ETFs: We’re waiting for a reset of the Early Warning Alerts

Comments and opinions written below this line of text may be provocative and only obliquely related to trading. Some may find these “Off the Wall” comments challenging to their outlook on life. I will not post any comments made on subject matter below this line, so if you disagree blast away.

OFF THE WALL

Off the Wall: No Off the Wall this weekend.

Share Your Success: Many of you have sent me notes regarding the success you are having with the Active Trend Trading System. Please send your stories to me at dww@activetrendtrading.com or leave a post on the website. Thanks!